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Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of: )
)
JONES INTERCABLE, INC. ) CUID No. IL0666
Western Springs, Illinois )
JONES INTERCABLE OF ) CUID No. VA0220
ALEXANDRIA, INC. )
Alexandria, Virginia )
)
Application for Review )
of CPST Orders )
MEMORANDUM OPINION AND ORDER
Adopted: August 6, 1998 Released: August 14, 1998
By the Commission:
I. INTRODUCTION
1. Jones Intercable, Jones Intercable of Alexandria, Inc., and Jones Spacelink, Ltd. (collectively,
"Jones"), operators of cable systems serving Western Springs, Illinois, Alexandria, Virginia, and Wheaton,
Illinois, respectively, have filed a consolidated application for review of three cable programming services tier
("CPST") rate orders released by the Cable Services Bureau ("Bureau"), together with a motion for leave to
consolidate that review. The application for review of Western Springs and Alexandria raises issues relating
to the Bureau's adjudication of Jones' CPST rates concerning equipment cost and revenue data and the proper
completion of FCC Form 393. The issues raised in the application for review of Wheaton relate to calculating
refund overcharges. We address the issues raised in Western Springs and Alexandria in this consolidated
Order and leave the issues raised in Wheaton for a separate Order.
2. Jones asks that the Commission reverse and remand Western Springs and Alexandria because
the Bureau has not allowed particular revenues to be included in calculations of its CPST rate. Specifically,
the Bureau substituted data from Line 34 (i.e., equipment and installation costs) in the worksheet of Jones' FCC
Form 393s for data in Line 104 (i.e. equipment and installation revenues) of Jones' FCC Form 393s, and
deleted revenues attributable to additional outlet fees from the rate calculation process. Jones also asserts that
the Bureau orders failed to recognize that Jones could increase its rates prospectively by the amount of external
costs that Jones had foregone during the so-called "gap period" from the effective date of the 1992 Cable Act
to the initial date of regulation in each franchise area, and that the orders are inconsistent with Time Warner
Entertainment Co., L. P. v. F.C.C. ("Time Warner"). Both of these actions resulted in Jones having a lower
CPST rate. No oppositions to the application were filed.
3. Under the Communications Act, and our rules implementing it, the Commission is authorized
to review the CPST rates of cable systems not subject to effective competition to ensure that the rates charged
are not unreasonable. Additionally, the Communications Act requires the Commission to adopt regulations
that include standards to establish, on the basis of actual cost, the price or rate for the "installation and lease
of equipment used by subscribers to receive the basic service tier, including a converter box and a remote
control unit and, if requested by the subscriber, such addressable converter box or other equipment as is
required to access programming" as well as the rates for the "installation and monthly use of connections for
additional television receivers." Prior to the implementation of rate regulation, operators were free to charge
subscribers fees for equipment and installation in excess of cost. The Cable Television Consumer Protection
and Competition Act of 1992 ("1992 Cable Act") and our rules in effect at the time of the complaints required
the Commission to review CPST rates upon the filing of a valid complaint by a subscriber. The filing of a
valid complaint triggered an obligation on behalf of the cable operator to file a justification of its CPST rates.
4. An operator may attempt to justify its prices either through a benchmark showing or through
a cost-of-service showing. The Commission's benchmark methodology uses a formula to derive a benchmark
rate against which the reasonableness of an operator's rate can be measured. The methodology is based on
the Commission's analysis of systems' rates that are subject to effective competition and is used to determine,
on an individual cable system basis, whether rates exceed the competitive rate level, and if so by what amount.
Comparing a system's rate with the rate computed from a benchmark formula enables the Commission to
determine an initial reasonable regulated rate for each cable system. The Commission has established forms,
in this case, Form 393, to implement the benchmark methodology. This method of determining rates was
upheld in Time Warner. In addition, the Commission adopted an alternative cost-of-service methodology
which is available to ensure that cable operators can fully recover costs. Under either methodology, the
operator has the burden of demonstrating that its CPST rates are not unreasonable. The law requires that if
the Commission finds the rates to be unreasonable, it shall determine the correct rates and any refund liability.
5. The Commission's original rate regulations took effect on September 1, 1993. The
Commission subsequently revised its rate regulations effective May 15, 1994. Operators with valid CPST
complaints filed against them prior to May 15, 1994 were required to demonstrate that their CPST prices were
in compliance with the Commission's initial rules from the time the complaint was filed through May 14, 1994,
and that their prices were in compliance with the revised rules from May 15, 1994 forward. Operators
attempting to justify their prices for the period prior to May 15, 1994 did so by filing FCC Form 393. These
cases involve the Bureau's interpretation of Form 393.
6. FCC Form 393 is the official form used by regulators to determine whether an operator's
regulated rates for programming, equipment and installations were reasonable during the time period from
September 1, 1993 until May 14, 1994. Through a series of calculations, Form 393 compares what the
operator is charging subscribers on a per channel basis to what the Commission's analysis determined a
similarly situated operator would charge if it faced competition from other providers. To make these
calculations, the operator's revenue, number of channels, and number of subscribers are analyzed.
7. Form 393 is divided into three separate, but interrelated parts which culminate in determining
whether the operator's current rate is not unreasonable and whether the rate charged for equipment and
installation is consistent with the law's standard. It also determines what the appropriate rate is. In Part II,
the operator calculates its maximum permitted programming rates through several worksheets, while in Part
III, the operator calculates its monthly equipment and installation costs and its maximum permitted equipment
and installation rates. Part I is a summary of the various programming, equipment and installation rates that
have been calculated in Parts II and III and provides the comparison to the rates the operator has actually
charged during the period of review.
8. Worksheet 1 of Part II calculates the operator's Charge Per Channel, as of its initial date of
regulation. An operator's initial date of regulation is the date the Commission received the first complaint
against the operator for its cable programming services rate in a community. To determine the charge per
channel, an operator begins Worksheet 1 by entering the current monthly charge for its basic service tier and
for each of its cable programming services tiers (Line 101). The operator then enters the number of channels
on each tier (Line 102) and the number of subscribers for each tier (Line 103). On Line 104, the operator
calculates its monthly equipment revenue and enters it. The operator then determines the Charge Factor (Line
105), by multiplying the current charge for the tier (Line 101) by the number of subscribers (Line 103), and
obtains the total revenue received from the tier. The monthly equipment revenue is then added. The operator
then determines the Channel Factor (Line 106), by multiplying the number of channels (Line 102) by the
number of subscribers (Line 103). The channel factor is used to determine the Charge Per Channel (Line 107),
by dividing the Charge Factor by the Channel Factor. The operator's Charge Per Channel less the Franchise
Fee allocated to the channel (Line 109) is the operator's Base Rate Per Channel and is reflected on Line 110.
9. If the Operator's Base Rate is less than or equal to the Benchmark, it is accepted. If the Base
Rate exceeds the Benchmark, the operator completes Worksheet 2 - Calculation of Rates in Effect on
September 30, 1992 and Benchmark Comparison. This worksheet determines how much the operator must
reduce its rates. The calculations require the operator to reduce its rate per channel to the Benchmark or 90%
of its rate per channel in effect on September 30, 1992. The greater of these two rates then would become the
operator's Base Rate and be placed on Worksheet 3.
10. Prior to the 1992 Cable Act, cable operators typically included the costs of some equipment,
such as converters, in their tier rates and established separate charges for other equipment, such as remote
controls and additional outlets. The 1992 Cable Act required that the charges for equipment and installations
be assessed to the subscriber on a cost basis. As a result, the Benchmark methodology was not used to
establish equipment charges. The Commission required cable operators to remove or "unbundle" equipment
and installation rates from rates for cable programming services to calculate maximum rates in accordance with
the 1992 Act. This was necessary to ensure the "ability to assess the reasonableness of any charges for
equipment provided as part of cable programming services." Unbundling equipment rates is performed on
Worksheet 3 of FCC Form 393 ("Removal of Equipment and Installation Costs"). The number on Line 301
of Worksheet 3 is taken from Line 34 of Part III, which is the worksheet used to calculate equipment and
installation charges. The operator enters the figure for monthly equipment and installation costs from Line 34
on Line 301 of Worksheet 3, which is then subtracted from the operator's Base Rate to remove equipment costs
from the programming rate calculation.
11. In a Public Notice, released November 10, 1993 ("Public Notice"), the Commission stated
that where an operator had restructured its rates to ensure that equipment and installment rates were limited
to costs, as of September 1, 1993, it anticipated that the number placed on Lines 104 and 301 of FCC Form
393 would be "the same, or nearly the same . . . ." This is because Line 104 is the operator's monthly
equipment revenue, including installation fees, and Line 301 is the operator's monthly equipment and
installation costs calculated in accordance with the Commission's rules. If the operator had already
restructured its rates pursuant to the law and the Commission's rules that equipment and installation rates be
limited to costs, the revenues collected (Line 104) would not be significantly different than the amount
calculated as the operator's costs (Line 301).
II. THE BUREAU'S ORDERS
12. The Bureau orders, based on the review of Jones' FCC Form 393s, established CPST
maximum permitted rates lower than its actual rates. The Bureau substituted Jones' data in Line 104 (monthly
equipment revenue) with Jones' data from Line 34 (monthly equipment and installation costs), an amount
substantially less than the Jones data, which resulted in a reduction of the CPST rates for both Jones' systems.
The Jones data represented monthly equipment revenue prior to the effective date of rate regulation. As noted,
an operator's maximum permitted rates are derived from its aggregate revenues for regulated programming,
equipment and installation. The Bureau's substitution deleted the additional outlet revenues Jones had collected
prior to rate regulation. Jones' maximum permitted rates were lower than they would have been had the
revenues from the additional outlets not been deleted. It is the deletion of the additional outlet revenue that
Jones contests.
III. ADDITIONAL OUTLET REVENUES
A. Petitioner's contentions
13. Jones contends that the Bureau impermissibly lowered the systems' per channel benchmark
rates when it placed the same number on Line 104 in Part II of Worksheet 1, and Line 34 in Step G of Part
III. Jones believes the Bureau failed to consider all of the equipment revenue, including additional outlet
revenue, that Jones had collected prior to the onset of rate regulation, and that if it had, Jones' maximum
permitted rates would be higher as a result. Jones acknowledges that, while it did charge subscribers additional
outlet fees prior to rate regulation, it was no longer permitted to do so as of the initial date of rate regulation.
Jones contends that, consistent with the Commission's Third Order on Reconsideration in MM Dockets No.
92-266 and 92-262, it should be permitted to calculate its rates using pre-regulatory revenues, including
revenues for additional outlets, provided that, at the time Jones restructured its rates, the data were accurate.
14. Jones states that the instructions for Line 104 of Form 393 direct cable operators to calculate
their average monthly equipment revenues by dividing the last fiscal year's total revenues by 12 for the
following categories of equipment and installation services: converter box rental; remote control rental;
additional outlet fees; installation fees; disconnect fees; reconnect fees; and tier changing fees. When cable
operators calculate Line 34 in Part II, they add the capital costs of leased equipment and the annual cost of
maintenance and installation of cable facilities and services to obtain the total annual consumer equipment and
installation costs for the system. This amount is then adjusted (as necessary) to apply it to the franchise area,
and the remainder is divided by 12 to obtain the monthly equipment and installation costs. Since the latter
calculation does not allow for any costs attributable to providing additional outlets, Jones argues that Line 104
will always vary from Line 34. Citing the Bureau's decision in Staten Island Cable of New York City, Jones
contends that this situation constitutes a special circumstance, for which operators should be permitted to utilize
old data, which were accurate at the time of rate restructuring, when calculating Line 104.
15. Jones adds that the Bureau should modify its Public Notice because it differs from the Third
Recon. Order, where the Commission held that cable operators are not required to change their rates when
different rates are dictated by data, such as inflation adjustments and the number of channels used, which were
used in initial rate setting, as opposed to data which were current when the operators filed their FCC Forms
393 either with the Commission or with their local franchising authorities. Although the Third Recon. Order
also required that operators use current data when making any subsequent rate changes, Jones contends that
since its additional outlet revenue data do not change, it should not be precluded from including it when
calculating Line 104.
16. Citing instructions in FCC Form 393 relative to Line 104, as well as the Commission's Third
Recon. Order, Jones asserts that it was entitled to use pre-regulatory data in Line 104. Jones claims that the
Commission permits operators to use data to justify their rates as long as that data was accurate at the time
of rate restructuring. Jones contends that its data was accurate at the time and that it should be allowed to use
that data. It is Jones' position that, because it received revenues from additional outlet fees prior to rate
regulation, and such revenue was included in its entry on Line 104, its entries on Lines 104 and 34 should differ
by approximately the amount of the revenues received from additional outlets. Furthermore, Jones alleges that,
simultaneous with Commission pronouncements that Lines 104 and 34 should be the same, or nearly the same,
for operators who restructured their rates as of September 1, 1993, the Commission has acknowledged that
special circumstances may exist which produce discrepancies between lines 104 and 34. Jones contends that
the differing treatment of additional outlet revenues prior to and subsequent to the advent of rate regulation is
a special circumstance that would not only permit, but would require a discrepancy between Lines 104 and
34.
B. Discussion
17. The purpose of Form 393 is to compare an operator's rates to a similarly situated operator
facing effective competition. The Benchmark and implementing methodology is premised on Congress'
direction that rates approach that which would be reflected in a competitive environment. The Commission's
policies, including the Benchmark and Form 393, also encompass the law's requirement that fees for equipment,
installation, and additional outlets be provided to subscribers at cost. Any regulated revenues, therefore,
derived from equipment and installation should approximate the costs of providing such installation and
equipment. Conversely, any regulated revenues relating to installation and equipment that significantly exceed
the cost of providing them is inconsistent with the premise of the law and will distort any calculation seeking
to implement it.
18. The instructions pertaining to Line 104 in FCC Form 393 state that revenue earned over the
last fiscal year, including revenue from additional outlet fees, should be used to determine an operator's monthly
equipment revenue entry on Line 104. In the Public Notice, we provided clarifying instructions and
specifically discussed the issue of the relationship between Lines 104 and 301 (which is carried over from Line
34) on FCC Form 393:
The instructions for completing Worksheet I Line 104 of FCC Form 393 specify that
equipment revenues for the year preceding [September 1, 1993] shall be used in computations
of the current rate per channel which is to be compared to the benchmark. Revenues for the
previous years may not be sufficiently representative where the operator has already
unbundled and instituted cost-based pricing in accordance with our requirements. This answer
clarifies that in completing Line 104 operators must use equipment revenues that will be
representative of the equipment rates that were in effect as of the initial date of regulation.
Where available, actual revenues should be used. Where operators have restructured
equipment rates as of September 1, 1993 in accordance with our regulations, we would
anticipate that in most cases, absent special circumstances, operators will enter on Line 104
the same, or nearly the same, number as on Line 301. Line 301 is the anticipated revenues
based on equipment rates derived in accordance with FCC rate regulations.
Jones restructured its rates on September 1, 1993 to comply with the law. It was reasonable for the Bureau
to presume that Jones' entries for Lines 104 and 34 (which is the same as Line 301) on its FCC Form 393s
should be the same, or nearly the same. The difference of over 9% between Line 104 ($158,808) and Line
301($143,431) in Alexandria, and the difference of approximately 63% between Line 104 ($13,705) and Line
301 ($5,054) in Western Springs cannot be characterized as "the same, or nearly the same." We note that the
complaint was filed on February 28, 1994, subsequent to release of the Bureau interpretation in the Public
Notice (November 10, 1993), and that Jones had an opportunity to prepare its submission in a manner
consistent with the Public Notice.
19. Jones' asserts that its additional outlet revenue constitutes a "special circumstance" permitting
a discrepancy between Jones' entries on Lines 104 and 34. It is not. The reference to special circumstances
in the Public Notice encompasses situations where restructured rates may not equal costs. The Public Notice
sought to ensure that operators did not include pre-restructuring revenues in Line 104. In completing Line 104,
Jones must use equipment revenues that are representative of equipment rates in effect on the initial date of
regulation. Additional outlet revenues generated from non-cost-based rates established prior to the initial date
of regulation are not representative of rates in effect on the initial date of regulation and distort the Benchmark
methodology used to determine whether a rate is reasonable. The Public Notice correctly presumed that
operators who had restructured their rates as of September 1, 1993 had done so in accordance with
Commission regulations. Pursuant to Commission regulations then in effect, rates for equipment, including
additional outlets, were to be calculated based on actual cost methodology.
20. Jones' reliance upon the exception in the Third Recon. Order permitting operators to rely upon
"old" data if its current rates are accurately justified using the old data and that data was accurate at the time
is misplaced. The Commission reasoned that operators should not be penalized for making good faith attempts
to comply with Commission rules. The Public Notice stated that, pursuant to 76.922(b) of the
Commission's Rules, operators should refresh cost or other financial information as of the initial date of
regulation, based on the most recent information available. Operators who added or deleted channels on
September 1, 1993, in anticipation of rate regulation, were also instructed to use the number of channels as of
the initial date of regulation. Information, such as inflation data, is subject to revision. The Commission's
intention was to protect an operator who made good faith attempts and used the best available data at the time
it recalculated rates.
21. In Jones' case, however, the facts (i.e. data) have not changed during the intervening time
between the rate restructuring on September 1, 1993 and the initial date of regulation on February 28, 1994.
Unlike the situations contemplated by the exception carved out in the Third Recon.Order, this case simply does
not involve data that subsequently became available. The revenue figures that Jones is attempting to use in
Line 104 have remained the same. Post-restructuring revenue from equipment and installation in excess of
cost, which Jones is attempting to use, is inconsistent with the law and inappropriate.
22. Jones' reliance on Staten Island Cable is also incorrect. Staten Island Cable involved an
operator that changed its channel configuration on October 1, 1993, after it had restructured its rates on
September 1, 1993. The Bureau stated that "[o]ur rules do not require an operator to set its initial rates based
on anticipated adjustments to its channel line-up." Staten Island Cable involved the limited exception where
the restructured rate did not have to reflect the addition of a new channel occurring after the operator initially
restructured its rates but prior to the rate review. Jones, in contrast, is attempting to use flawed data (i.e.
preregulatory revenues) which distorts the analysis needed to determine the permitted rate.
IV. EXTERNAL COSTS INCURRED DURING THE GAP PERIOD
A. Petitioner's contentions
23. Jones states that neither of the Bureau orders accounts for any external costs incurred during
the "gap period" which is the period from the effective date of the 1992 Cable Act to the initial date of
regulation in each franchise area. Jones cites the Court of Appeals' decision in Time Warner and argues that
it must be allowed to adjust its rates prospectively for each of the systems in order to account for the gap costs
that should be included in computing the Form 1200 series rates.
B. Discussion
24. The so-called "gap period" refers to that period after enactment of the 1992 Cable Act and
prior to the date of initial regulation where cable operators may have experienced increases in external costs.
These costs were not reflected in the rate survey used by the Commission as the basis for its Benchmark
methodology. The Commission's rate rules, as revised in the Second Order on Reconsideration, implemented
the Benchmark system premised on a survey demonstrating a 17% average difference in rates between cable
systems operating in competitive and in non-competitive situations on September 30, 1992. Cable operators
subject to full reduction were required to reduce their rates by 17% of their September 30, 1992 regulated
revenues and were permitted to adjust their rates upward to account for inflation between the September 30,
1992 survey date and the actual date when the reasonableness of their rates were being judged. Rate
adjustments after the start of regulation were premised on inflation and on actual changes in external costs.
Increases in external costs that took place between September 30, 1992 and the actual date regulation
commenced were not permitted. The Commission believed that to do so would entail a considerable
administrative burden both on cable operators and on the Commission since it would be necessary to apply
Commission cost accounting and cost allocation requirements back to September 30, 1992. The Commission
held that any greater rate accuracy was outweighed by the administrative difficulties to both cable operators
and the Commission in establishing September 30, 1992 as the starting date for external cost treatment.
25. In Time Warner, the Court overturned the Commission's decision of not permitting operators
to make adjustments in their Benchmark calculations for external costs during the gap period. The Court stated
that cable operators would only make such adjustments in cases where the revenue to be gained from the
adjustment exceeds the cost of its recovery. The Court also stated that the administrative burden imposed on
the Commission will be substantially unchanged, because the documentation to be reviewed during the
administrative process would be the same as the external-cost documentation that would have to be reviewed
for all post-gap periods.
26. In response to the decision in Time Warner, the Commission adopted 76.922(f)(4),
allowing cable operators to adjust their current Benchmark rates to reflect external costs occurring between
September 30, 1992 and their initial date of regulation, reduced by any inflation increases already received with
respect to those costs. Operators were directed to report these adjustments in their FCC Form 1210s or 1240s
that they are required to file to justify their rates. These forms permit the operator to calculate and justify their
rates on a quarterly or annual basis for the period subsequent to May 14, 1994.
27. Jones, however, has already recovered its "gap period" external costs through its cost-of-
service filings in Western Springs and in Alexandria. As we have stated, the cost-of-service methodology is
an alternative to the Benchmark methodology which a cable operator can invoke if it believes its maximum
permitted rate under the Benchmark methodology will not enable the operator to recover its costs. Because
Jones submitted cost-of-service filings on August 15, 1994 for Western Springs and for Alexandria, it may not
now attempt to justify its rates through benchmark adjustments for external costs incurred during the gap
period. Jones may recover "gap period" external costs through either the benchmark adjustments or the cost-of-
service methodology, but it may not double recover these costs.
V. ORDERING CLAUSES
28. Accordingly, in view of the foregoing, IT IS ORDERED that the motion to consolidate review
IS GRANTED with respect to Jones Intercable, Inc. and Jones Intercable of Alexandria, Inc. and IS DENIED
with respect to Jones Spacelink, Ltd.
29. IT IS FURTHER ORDERED that the consolidated application for review filed November
24, 1995 on behalf of Jones Intercable, Inc. and Jones Intercable of Alexandria, Inc. IS DENIED.
FEDERAL COMMUNICATIONS COMMISSION
Magalie Roman Salas
Secretary